On 2 December 2008, the Duties Amendment Bill 2008 (Bill) was introduced into the Victorian Parliament. The Bill gives effect to the Victorian Government's recent media release announcing that it had moved to close a loophole which allowed the use of complex long-term lease arrangements to escape stamp duty liability. The changes are, however, not limited to long-term leases and may have significant financial implications for all tenants in Victoria. The changes may also affect the products offered by a range of vendors and property developers, in particular retirement village developers.
What types of long-term leases are affected?
The definition of "lease" in the Bill is not restricted to "long-term leases": lease is defined as "a lease of land in Victoria or an agreement for a lease of land in Victoria". No minimum lease term is required.
The Bill proposes to make the following transactions "dutiable transactions":
- "the granting of a lease for which any consideration other than the rent reserved is paid or agreed to be paid, either in respect of the lease or in respect of" a right or option to purchase the land, a right of first refusal in respect of the land or any other arrangement by which the lessee or an associated person obtains a right or interest in the land other than the leasehold estate;
- "the transfer or assignment of a lease for which any consideration is paid or agreed to be paid" (irrespective of whether a lease premium was paid on the initial grant of the lease); and
- "the surrender of dutiable property" (including a lease of a kind referred to in the above dutiable transactions).
It is not clear whether the phrase "any consideration other than the rent reserved" will be construed more widely than just lease premiums. For example, the wide drafting leaves open questions as to whether "consideration" could include:
- an agreement to pay outgoings, to maintain and repair or to make good the premises at the end of the lease term (i.e. the changes could potentially apply to all leases);
- an agreement for lease whereby the tenant agrees to undertake work on the land (e.g. construct a building) in consideration for the grant of a long term lease over all or part of that land; or
- the purchase price in the case of business sale transactions which include the transfer or assignment of leased business premises.
The Bill provides that where one of the above dutiable transactions occurs, duty will be payable on the greater of the consideration (other than the rent reserved that is paid or agreed to be paid) and the unencumbered value of the land that is the subject of the lease. This may be considered to be a harsh result given the range of dutiable transactions that appear to extend beyond the types of complex long-term lease arrangements (effectively amounting to economic ownership of the land) referred to in the media release.
It is noted that the media release stated that the changes "will not affect those entering into ordinary commercial leases". This approach is not reflected in the Bill.
The Bill also does not contain an anti-overlap provision to prevent duty being charged on both an agreement for lease and again on the lease itself.
The changes will apply to dutiable transactions occurring after 21 November 2008 (the date of the media release).
What other changes are contained in the Bill?
The Bill also reduces the time period within which taxpayers must pay stamp duty from 3 months to 14 days after a dutiable transaction (generally settlement) has occurred. This change was not foreshadowed in the media release. The reduced 14 day time period will apply to dutiable transactions occurring after the date the Bill receives royal assent (which should not be until Parliament resumes sitting in February 2009). Taxpayers will need to take care to meet the new deadline otherwise interest and penalties may be applied.
Who could be affected by the changes?
Tenants entering into lease structures where a premium is paid are likely to be affected by the changes. Developers should also consider the implications of the changes and their impact on the products offered to the market.
The changes, depending on how they are administered, may affect lease arrangements in a range of circumstances.
Retirement village and aged care facility operators, for example, may be affected. Residents are commonly given tenure through long-term lease arrangements where premiums are paid or lent by the resident to the operator. Under the Bill as drafted, new retirement village tenants will incur duty on the freehold value (even though the product is structured through a relatively low up front payment so as to make the accommodation affordable).
Likewise, operators of such facilities are commonly provided with rights to communal facilities through long-term lease arrangements with the freehold owner.
It is not uncommon for a commercial property vendor to enter into a short leaseback (for 6 months or a year) commencing on settlement of a freehold sale subject to the payment of a premium that is deducted on settlement. In that situation, under the Bill as drafted, the vendor/tenant may be subjected to duty on the freehold value.
Affordable housing arrangements, where struck on a leasehold basis, also appear to be adversely impacted.
We will issue a further legal update when the Bill receives royal assent.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.